You may have heard of the money saving capability of a 1031 tax exchange - and how it allows you to defer all of the capital gains taxes on the sale of your investment property, buy moving them into another investment property that is similar in kind. But it isn't possible to use the money from your exchange to pay the debt on an investment property that you already own - and likewise, you can't build improvements on land that you own with a 1031 exchange.Commissioning updates on land that you already hold title to doesn't qualify as "like-kind", and can be problematic for uneducated investors.

The 1031 exchange proceeds would ideally be used to make the build to suit to your specifications on the new land, i.e., you secure the desired property and buy another investment property that is equal to or greater than in value. So how is it possible for you to do this?

There is an option called "the poor man's build to suit exchange" wherein the buyer requests that the seller make the desired improvements to the structure prior to the completion of the sale. An investor, for example, sells an investment property worth 0,000 and intends to buy a replacement property worth the same (or greater).But the replacement property is only worth about k, which isn't enough to qualify as a "like kind" exchange, and therefore not "transferable" under 1031.

In this case, the property investor would request that the seller raise the price of the property 0,000 - but before closing - construct ,000 worth of improvements to the investment property. After all is said and done, she'll purchase a replacement property or the same value, which is 0,000.

It might be difficult to find a seller who is willing to increase the price of the property - in order to make improvements to it before selling it to you.  Alternately, in our investors case, she can have her QI purchase the investment property on her behalf for k (using an LLC that the Qualified Intermediary owns outright) then construct the improvements to the property using the remaining funds from the exchange.

So likewise, your QI can fund the improvements during their construction, holding the property for you and paying for everything with the proceeds from the exchange. When the improvements to the replacement property are finished, the investor can complete the exchange by receiving the property from the QI.

These are important things to consider when you are conducting a build to suite exchange. First, the 180-day requirement in order to complete a 1031 exchange does not allow sufficient time for an elaborate Build to Suit.  And existing structure can hopefully be updated and rehabbed within this time.

2nd, any updates made to the replacement property must be considered, "real-estate" to actually be part of a "like kind" exchange, i.e., real estate for real estate. Merely dumping materials on the property will not suffice; the materials must be constructed or affixed into the land and be made a permanent part of the structure to constitute real estate.

Keep the foregoing in mind and you can avoid any pitfalls and get all of the tremendous tax benefits of a 1031 exchange that is build to suit.